Great to be here and to think new america of for your leadership on seoul many projects i have been involved in. It is great to have you here with your leadership. So lets start. One of the things from the personalities of the day is a financial crisis cannot be predicted the crisis of 2007 and 2018 and in the future it cannot be predicted. Some referred to these as a black swan the event. A one type of generation. We believed this crisis can be readily connected we can prevent them and to focus on private debts rather than public debt. I start to give you a sense how big a factor verses Government Debt and other thing this. Looking at the chart the negroes in these categories between 1997 and 2007 which was the decade leading to the crisis itself. As you can see, a private debt grew 14. 4 trillion in the 10 year period. Government debt grew 3. 5 trillion with that money supply and its tour said gdp itself. Is the biggest factor in the economy. And over this 10 year period by 1. 5 trillion and exports are 3. Five increase over a 10 years period if you lower taxes by 10 percent that would be 2 trillion. Lending created 14 before trillion dollars in this period the 800pound gorilla. Private debt was the cause of the 20072008 crisis the big part was mortgage debt was the percentage of gdp 1970s 30,000 mortgage debt grew 17 percent per decade in the six years between 2001 and 2007 it grew an astronomical 36 that is what precipitated the crisis. Not just more gauge that but all forms will get at these levels private debt in aggregate with Consumer Debt those to together grew three gdp and frankly even though these levels have moved a little bit by historical standards private debt is still near the alltime high. , and the consumer side and the business side. We ask the question if it causes the crisis is that a factor another major crisis in our lifetime . We looked at the depression and charade of the telltale pattern of rapid increase of private debt in the five years leading up to the stock market crash. In 1927 and there was a skyscraper being built in texas larger than any on the continent of europe. Looking at the japan crisis were this black box is it is a major crisis and again to see a telltale pattern of very rapid growth in the fiveyear period and in this case 28 . And Government Debts which is right here is low and very benign. In japan you have the same thing in the fiber eight years before the crisis Government Debt is low. It is not a factor then we look at the asian crisis of 97 the other major crisis in post world war 2. The two biggest crisis was indonesia. And then the five years prior to the crisis 29 then indonesia and in both cases Government Debt is low and benign. Heres an even more extreme case after it continues to have the most egregious situation. Beating up to the crisis private debt grew by an astonishing 49 . Public debt actually improved when you have the lending boom the revenue flows in and it feels like a miracle. And we look comprehensively at every crisis in Major Economies in the world. There was 22 countries with half a trillion or more gdp collectively 85 so look at those you look at the world. Small countries can have a crisis because they are next door to a country and that alone could cause them the four Major Economies, any time you have private. Gdp growth 18 or more than five years with that overall level you have a crisis. That happens almost without exception. [inaudible] an excellent question. I will say one more thing first. Is not just mortgage debt a lot of commentators say this is a mortgage debt phenomenon then we can prevent a crisis but others have been more business than it in japan and 91 it was commercial real estate that was true in korea 97. The the key is tracking aggregate private debt to gather not just the consumer. So why does run away private lending . I use the term run away lending to describe it. Why . Two reasons. First of all, you built too much of something you build weighed more of something van you need in the case of the 27 2007 crisis too many houses far in excess of the demand. In japan 91 korea 97 it was way too many commercial Office Buildings. In industrial plants. Look at this phenomenon in the 1800 and that huge crisis was way too many railroads. When you do that you have made a lot of loans that will be bad loans there is no income to repay those and that creates the crisis. To give you a sense United States created 2. 5 trillion dollars of bad loans. U. S. Banking system has a trillion in capital that alone should have alerted us there was a problem. Once this has happened monetary and fiscal policy with the japanese government have relied on exclusively it cannot really solve the problem. One is capital and the other is time if you have way too many Office Buildings it will take time to web source that. You cannot shrink the time it takes to catch up to that excess capacity. Triggering events are often mistaken for the cause of the crisis so a stock market crash is thought of as the cause of a bank failure is thought of as the cause that is not the cause. The cal is already out of the barn there has already been a fiveyear buildup you already had too many bad loans. There are a lot of other explanations. Not a week that goes by that somebody does not comment somewhere. People blame it on a government that we can see that is not only not an indicator by contra indicator to talk about current account deficits currency issues we looked at 20 different factors over all the years we have data ned of those are a good predictor of runaway increases of private lending. Now step aside apart from its will to generate a crisis higher levels of private debt is a problem in and of itself here is a startling statistic i had to spend a couple of months to recheck that data. But in 1950 private debt and gdp was 55 percent todays 156 private debt has tripled in the United States in over two generations. What happens when you have so many people that have this high of the burden they have to take their income to spend a disproportionate amount to pay down debt that is money they could otherwise spend on vacation and restaurants and Home Improvement and others saying saddam power tv content dash gdp this is supported by a number of studies from the imf. Once accumulated, debt acts as a suppressant to growth. Not just in the United States the big six u. K. , germany, france, you can see this group in 1970 was clustered around the 75 now closer in aggregate it is a global phenomenon. How do we prevent and how do we repair . If you are convinced of this theory is easy to see many years ended chance. I know regulators have a broad arsenal of ways to influence behavior your Capital Requirements they can jawbone or any number of things. Recalled the behaviors there were not ordinary but to those who had no income or no job. A regulator can intervene to influence that type of behavior. We think by monitoring the advocate aggregate applicators could see this but that leads to the issue of repairing the crisis because we accumulated a lot of private dash so the way to a lot stronger growth is to reduce our ratio. Says a lot easier said than done. To have people pay down debt but that takes money out of the economy to contract gdp. That is exactly 1930 through 1933. It is selfdefeating. People talk about growing your way out of the problem. But 200 years of economic history with a tidy exception it only succeeds gdp growth in modern economies so there is no reason to think we can grow without private debt at a faster rate than Economic Growth there are technical reasons i dont think it is possible but if it was any assumptions you want to make to get back to that level inflation does not get you but the process of elimination that means restructuring debt. To go up and tear of the contracts with problematic loans with lower debt levels. There are 9 million mortgages in the United States better still under water these are folks who are current on their pavement but struggling and as a result are not spending money on vacation. And what would power gdp . There is a lot of objections based on moral hazard. But we suspended our concerns when we say to the banks may just didnt do well for the borrowers. Maybe it is not feasible but i promised if you did it would supercharge Economic Growth the other thing that is interesting is the high level of debt in japan and europe has serves to put pressure with the deflationary position ever since the crisis so 23 or 24 years but japans 220 is still at 170 coming down painfully slow that has been the deflationary agent you want to get rid of deflation in japan . Reconstruct your dead that. You start to read those headlines in europe. Oh my god refacing deflationary in europe and in United States friday gdp is 56 in spain it is 216 portugal where there is just a bank failure to hundred 55 255 . To reverse this is where you go. So with that behind us where are we concerned today . China. Where after you can see private debt levels through the mid 2000 it has been on the tear. 18 percent is a threshold china is almost 60 percent. That is the source but we also read about over capacity you all read about the coast city symmetry of the state has been built beyond the need of the country there are entire cities that are empty with tens of thousands of empty residences. And the absolute level we have a new number it looks like over 200 . Run away lending again yielded over capacity. Realestate, land, excess manufacturing, empty shopping malls. What is the future of china . We think the crisis is possible but they have something that was not true with United States but they own the banks so it is unlikely china allows for that type of crisis. In addition it has lowes central Government Debt and ample net worth probably 3 trillion of foreign currency reserves of the books. It has the capacity to deal preemptively but even so it has a significant and increasing level of overcapacity. People rejoiced recently when china reaffirmed the gross level was 7. 5 . Every day gave us sigh of relief but gdp growth is more of a measure of that capacity being created so if china continues to grow at a high number it compounds the overcapacity problem and things could unravel we think it will not be tomorrow the we actually doing a new project to come up with the project house this will happen but china has to see significant accelerated growth and japan could be foreshadowing effect it has grown as near zero in real terms of what we call sideways growth. Some time it will phase of a generation of sideways growth. We think china needs to act preemptively and it needs to slow down gdp to stop building capacity. That is our brevity. Thank you. [applause] for someone who has been following markets this could be surprising. But lets start with the matter how could you confer there is a causal relationship because of the private debt that the correlations exist . We looked at the 22 instances where we have data 20 of 22 it led to a crisis no crisis have occurred where it has not and those two instances was all striate and south korea. That are adjacent to europe so theyre in the cross hairs and probably will of the round of. Government once consumers to spend and the markets are focused on public debt. The argument is against women tom. The two major schools of thought are we need to stimulate the economy, hes that type of description if we have to rein in spending and take both of those. If we stimulate through Government Spending it still does not address the biggest factor. Frankly on the eve of the crisis the hawks were concerned about inflation and they still are. Neither sides theory has any Predictive Value it addresses the single biggest factor on the market so theyre both wrong. [laughter] i dont think the issues they deal with are incorrect but our secondary or tertiary to omit the consideration. Is public debt irrelevant and their policy vacate makers making as huge mistake with longterm economic consequences . Look at public debt. I dont think the concern about public debt is of this step but we spend 100 percent of our time thinking about it take japan has the illustration the public debt to gdp in the 80s was 60 in the United States right now we have 100 percent. But to counter the crisis to get things going in those 20 years since then has grown from 60 to 240. What was a private debt crisis solely through public debt is also a public debt crisis if it 91 they spent more of their time restructuring private debt there would not stimulate that level of the policy adopted so to make that scenario. It is to problems out of one. Why has public debt increased so much . One of the Amazing Things to look at with economic history. Believe me finding data for the 18 hundreds was not easy. With the state House Building public get the 200 your trend it is an exercise of private and public debt have both continue a drone in excess of gdp so our conclusion is private debt growth is necessary to fuel a gdp growth and that is fine as long as it is low but only when it grows too rapidly it is a problem. At levels it is a healthy and necessary part if you are a business and want to manufacture more widgets you barrault if you are a Small Business owner with one store to build the second you will borrow to do that. It is good but what is true of an individual and a distance too much debt is also a true. But when you look at that Growth Opportunity is an inevitable that private debt will lead to that and isnt it in some unstoppable . It is but controllable by one important tool by a baker that we know intimately is that Capital Requirements. So right now looking at 10 you have to raise another hundred billion. And it is hard. It is a natural breaking element in the instances of runaway private growth through securitization i was a banker and i did that to. So to minimize the capital recreates that. But to curtail runaway growth it is to increase Capital Requirements it is as efficient mechanism. So post crisis has increased Capital Requirements but not enough . Was an aspect i will get the number wrong but the aggregate capital in the system required is 68 billion. We created 2. 5 trillion dollars it is a drop in the bucket. The debate has been 10 or 11 or 12 Capital Requirements for the debate should be 15 or 20 . The baking industry is to effected if for that to be a consideration but if you examine that system that is the answer. Talking about how to address it Consumer Behavior the creditcard industry higher to address each one . Andrew takes responsibility and who cant . Un like a lot of people in the tens of thousands of articles written about this crisis or the Great Depression there is always this desire to find a moral echo that consumers should not that the banks were nefarious but i was in the mix although there were a lot of bad actors i do not think there is a moral failing to have created this crisis i dont think the consumers acted maliciously the he got married and had a kid and wanted to buy a house this consumer moved across the country that was the majority of the home buying activity i think the issue is not moral but structural and that is the Capital Requirements. To consumers need to adjust behaviors as well . To redefine that American Dream . The Home Ownership makes up a large part College Loans make up a large part is the American Dream out of reach . If oread have magic want to restructure large amounts of debt i think things would egest people would be readily able to participate. Do it over with higher Capital Requirements but again if we did this we spent an enormous amount of time as part of this exercise to go back to 1945 to look at the Financial Wisdom to know home because ambitious the assumption we looked at that 70 years and. For says owning a home. That is more or less the plush. But in more developed urban areas the mortgage is somewhat of a myth is the essential element. People need to start thinking that way . I dont think it hurts them. It is relatively high two des moines. Is there an argument here that what this shows 82 catch up to inflation because things cost so much more to make up that difference . You are right wages do need to catch up but again without wanting to be repetitive one of the things his the sufficient demand in our economy if you have that pentup demand would have a lot more people employed and employers have to pay higher wages to do that. What demands it in itself is restructured. Lot it damaged the bakes or the private sector . What scenario puc that . That is the question we have an attires a section that requires this and he did this very quietly in the age before facebook and twitter to happen almost without notice lending far too much with almost no chance if those banks had written them down they would fail or come very close. To identify a bill loans to write it off but we as regulators give forbearance when we do those reserve calculations so in essence the government did not have to bail the banks out they could recapitalize to put this bad debt in the deferred expense account then nobody noticed and everything is fine. Talk about those 9 million mortgages now for a home only worth 300,000 you could restructure the loan the bank would write off the 150,000 but instead writing it off 2014 they would write off one 30th i recommend 30 years instead of 10 the government does not have to reach capitalize the paradigm volcker established everybody one. But it was never mentioned. So to restructure the Capital Requirements are the other half . Thats right. When Interest Rates go up as everybody expects will that have the and inverse impact . Hagel absolutely have a suppressing effect it will definitely cause it to go up but will also happen is 300 basis point rise would increase u. S. Consumers somewhere between 300 million and half a trillion per year so not only will have any effect on the gross but a major impact of gdp itself and five levels of debt are growth that is the polls in Interest Rates down to begin with that is reasonable to think about. Said you think theres an appetite in washington to do that . No. [laughter] in fact, when it is mentioned frankly we saw it happen it is a Small Program the administration put forward. These are problems if successful will address 50,000 but 9 million mortgages or under water. They have not begun to approach the problem certain elements will show them as moral hazard and unamerican so i could be optimistic and frankly other books. I am not alone to put this idea for word hopefully it will Gain Momentum with a general understanding of the principles if you spend time with politicians you know, if you present with the idea the immediately go to their staff who is the textbook economist m a a ignore it. Before we can get that community. How close are we to another crisis . The issue is china were starting to do detailed work to map out exactly how long it can and deferred its problem we estimate to 3 trillion of bad debts which i necking keep the party going by simply ignoring those bad debt issues to let that rollover. We think that is what is happening now how long they can keep this going is the question we think they can for a while on fellow and or the high and five or six years if they keep it going longer than that the amount of excess capacity that will occur globally will be staggering at some point in time it unravels. Here is the irony the longer the party keeps going the tougher the day of reckoning we think it will go on for a few years. Internal risk is that further down the line . I think we just have lackluster growth Going Forward in the 50s and 60s it was going for it was optimistic so we look at this not is a crisis risk but sideways gross one say that with the gatt relative is could collapse of china or Slower Growth how much will that impact United States and europe and south america . And a disproportionate level of that brisket is in and around china itself in japan and australia and mongolia believe it or not. They have a lot of risk the amount of trading going on between china and the u. S. Is the of total activity is relatively small singledigit is the amount of lending done to businesses is a small number in the form of slower global growth. Thank you very much. To questions. The first one. Data crisis going for word is of the generation 185318731 of the points we make that is the invisible hand cells problems. But to restructure by those methods and in some respects there already quietly behind the scenes to recapitalized the institutions so we think china has the capacity but what they dont have is a magic wand for is the growth has to slow down. In the back. What to bring up an issue given the exorbitant amount of debt as those who fail to do so at a full capacity. In the United States right now 14 trillion is corporate debt 12 million is Consumer Debts of that about 9 trillion is mortgage debt. But lending is only 1 trillion. Is suggest United States has the capacity to supplement the educational system in the way it is not doing so i would argue the fact is that, it is problematic after world war ii when of the greatest things that happened was the gi bill. You are pretty quick to dismiss looking at that target of gdp and also address dodd frank bet did not address pauls 03. Basl iii . The one of the drivers of inflation is growth itself the reason i think that number one to let those correlations he almost never have a situation where it does not somewhere correlate and frankly high loan growth precedes inflation so the idea to me to have that generation of inflation with commensurate private debt growth we cannot observe it anywhere in history even to theoretically say its still does not put that big of a dent into your problem. We have no more work to do on that but basl iii it created a situation where the banks have a lot of latitude to grade their homework. They get to say this type of loan is only this risky. So for that reason alone it is problematic and less than 100 billion but this is another thing that basl iii that they dont recognize is if you make a good factory loading and it is low risk for exactly the same type it has overcapacity in that area. But that south beach and miami 70 built the first highrise condominium it was a spectacular loan. But then they built 10 or condominiums in rapid succession even the first loan became bad when all that extra loans were made and basl iii does not call folks to say you assign to this level of risk. Like a Rearview Mirror but it does not create enough new capital. That what type of capital requirement. But they look at history. Space now that they look at the performance and past performance but what the system does not recognize the category good today could be bad if we land too much into that category. It was priced 2007 and missed by 2. 5 trillion dollars. Rearview mirror. No stress exercise ever participated people do a stress scenario the actual crisis had anywhere near that. In advance of a crisis never contemplate the magnitude. Any other questions . One is for clarification. Look at the cyclical effect you shows a gross of a bike clarification of that crisis to get a sense that this crisis is different because it has not decreased significantly. Really what we face is a boom and bust. It is the bad thing. If the economist embraced your philosophy wouldnt your psyche find another method regardless of private debt . And mikhail take the second question first. [laughter] it is boom and bust that would be fine if had the same high and low but it has been doom and bust so every new boom is that a higher level than the previous. I think that is exactly the nature of Economic Growth but is the unrecognized component is but a very small minority that looks at this phenomenon of the tripling so what you have instead is a debate about Government Debt with no discussion or what happened after. But that the crisis from the Great Depression did you see a dropoff significantly to return to that boom period . And if not why has that broke in the cycle . The book goes into this in some detail the what preceded that Great Depression there was a material to leveraging of the 30s to the 33 bank loans declined by 25 percent that is unthinkable nominally it was 2 percent after 2008 that is a difference between 25 and 2 but the decline led dollar and 2 to the 45 decline itself and it was the issue why we had such a profound circumstance that we let them the average so rapidly and bernanke and others figured that out you have to use liquidity and capital to prevent so this time around we did not have that calamity because we prevented that the leveraging of little but not all lot but guess what we still have highlevel of debt private gdp with from 150 percent down to 50 that is how much it occurred we have not had that. We avoided the Great Depression that we are still looking around. So is it better tuesday leverage . It was not have been because every dollar that you spend is a dollar out of the gdp that we spent the money we would have attracted gdp by the 58 trillion economy. Of less fear restructure even though it is a lightning rod is the least bad choice. Federal government so in that circumstance is not only a big number but it is a place that displays public lending and i can trackback to world war i we did almost the same thing but the private sector did the borrowing so we flipflop by world war ii but at the end of world war ii when we start the great leveraging of public debt and the thing that makes it possible is the private debt. So the leveraging from 1945 to 1980 is a thing happens that tradeoff doesnt end until 1980. Private debt grows more than public debt strengths as a percentage of gdp and in fact its what enables. The Chinese Government thinks a major reason this is an Economic Transformation that refers to create the percentage of investment and create a percentage of consumption. So rebalancing. Based on my own personal experience i think there is a lot of times people use more and more private to consume. So with the control is an advised impact on the economic structure. First of all be joining our study team as we get into this into second i think you are exactly right. If you are rebalancing and asking the consumers to take a bigger share of the economy one of the ways they do that is through debt. Right now as the slide shows it has grown to 60 in five years and is now almost 210 so absolutely. Its the smaller part of it but its part of it. But you think this is more important than the economic Structure Transformation . I think if you are looking to rebalancing needs to occur area it is a harder challenge. We were talking about this today. Its harder to say rebalance. Its easier to say extraordinarily difficult to do. I think it has one impact but the one thing that has impact right now is the fact that they have way too many unsold homes and everywhere you look in that economy that is the issue. My second question is about the data analysis. You mentioned it is the projector of the economic crisis so i want to know which approach are you doing in your research is that all of the indicators in the model and that is to pretend you dont have the last data and you use it to see which has the real data. We look at the actual crisis which there is 22 by the definition of the financial crisis in the Major Economies in the postworld war ii period and weve looked at what was true in the five years leading up to that crisis and private growth of the gdp with 20 different factors. And when we did that, the results were overwhelming. Its almost always true you have it grow in it is almost never true you have a predominance of any other characteristics. Is that the correlation . Thats right. Do you have time for a few more questions . In the back and then did you ask a question . Okay. Then over here. Speck out of uc addressing the credit and the Financial Assets crisis . Others talked about this and others as well but the credit that the credit expansion acts as a price accelerator. You want to buy a house because the prices are going up which makes them less affordable and ironically many dont have a solution how to get out of that. It is a human shield for the financial industry. How do you have some kind of a systematic reform so you dont get into this almost inevitable situation to face years of stagnation or a liquidity crisis clicks. Co . We liked his work a lot and think it is spot on. There are another couple of academicians. There is a book called house of death and they did a wonderful job of parsing through this very idea. But what you are getting added is the underrecognized fact that lending the policy itself absent organic demand can cause the price values to go up. This is easy to think about relative to home if you are selling homes and every lender changes the policy from 75 to 100 the number of eligible fires increases and therefore the demand increases and the prices go up. So, a simple change in lending policy absent any other thing causes the housing prices to go up. But they dont recognize that and they think it is some function trend so they jump on the train and inevitably as the values collapse and you have the loans its easier to understand but that is that that is true in every asset category. With the Bank Financing of the Small Businesses banks must say when two individuals to buy businesses. If all banks lend at three times the valuation of the business is about three times that. And its the bank policy just because they are out of trying to do the bank across the street or because they want more loans or because they are just feeling confident, changed the policy to four times. The valuations goes to four times so it is a selffulfilling prophecy into this intrinsic. I hate to be a broken record but i think that the promise appointed prevents that. Thanks for your talk i thought it was interesting. It was interesting to hear your point about the good loan becoming bad because of the overcapacity in any given area. The Environmental Crisis which is pretty well recognized to be surrounding the increasing severity and the examples you gave up the creation of the overcapacity is an interesting example of bank lending not being oriented in the short or longterm property and creating the wealth thats going to sustain human life. Is there any way that you can see that banks lending in the creation of the future infrastructure that we have to live with hopefully if we survive for the next centuries that that can be tied up toward something that is going to allow us to whether this increasing storm or is the Government Action required . Thank you for that question. Im not an expert in that area, and there is clearly a lot more important things that need to be done to address that issue than that lending policy. But i think you are right that the lending policy could exacerbate the issue. Take the issue of coal. Right now china is buying 50 of the coal but that is a function of the lending and the moderate practices alone would reduce the consumption. Its in there somewhere. Any last words . What do you want everyone to remember as they leave here today . I just want to say thank you. Im grateful that everyone came in for all of you to give up time this evening is something that i greatly appreciate. [applause] take some time for coffee and thanks for coming everyone. From their recent trip to cheyenne wyoming, Roger Mcdaniel author of buying for joe mccarthy discusses the life and death of the senator lester hunt. The most significant positions in the country whose name is not remembered. Part of the problem is the nature of his death overshadowed the accomplishments of his life to cause in 1954, there was an enormous stigma of move about homosexuality and about suicide. And lester